The Sisyphean Corporation Is Considering Investing in a New Cane

question 59

Multiple Choice

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is each and is to remain constant. The canes have a cost per unit to manufacture of each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to ________.

• A) $10,500
• B) $3500
• C) $3150
• D) $2800

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Definitions:

Opportunity Cost

The result of losing potential upsides from other choices by committing to one.

Market Price

The current market price for purchasing or selling goods or services.

Opportunity Cost

The benefit lost when one decision is made over another, effectively the cost of forgoing the next best alternative.

Park Construction

The process of designing, planning, and building an area of land with recreational facilities, natural elements, and landscaping intended for public use.